Can You Roll an IRA Into Another IRA Without Penalties?

An IRA rollover involves moving funds from one retirement account to another with specific rules in order to avoid taxes or penalties.

The key rule to remember when rolling over is depositing your distribution into a new IRA within 60 days; failure to do so could incur income tax and penalty (if under 59.5 years old). This applies both directly and indirectly.

1. There is no penalty for a direct rollover.

When changing jobs and rolling over an employer-sponsored retirement account into another one, be mindful of any tax consequences. There is an annual maximum rule which applies to traditional, Roth, SEP and SIMPLE IRAs.

There are two methods for conducting a rollover: direct and indirect. With direct rollover, funds will move directly from one retirement plan to another while for indirect rollover, your plan administrator sends you a check that must be deposited into your new IRA within 60 days.

Many people prefer direct rollovers because there’s no risk of an oversight resulting in taxes or penalties, plus direct rollovers are exempt from mandatory 20% withholding requirements on indirect distributions from qualified plans and IRAs; indirect rollovers from other IRAs must, however, make up any withheld amount within 60 days or else be considered distributions that must be taxed accordingly.

2. There is a penalty for a late rollover.

If your IRA distribution falls outside the 60-day time frame, taxes and an early distribution penalty of 10% (if under age 59.5) are levied against it. To avoid this fateful scenario, redepositing funds within their allotted window is recommended to avoid incurring these penalties.

Direct rollovers require that the company holding your first retirement account provide you with a check for the amount of the distribution, which you then sign and deposit into your new IRA. When doing a direct rollover, 20% is withheld from this distribution for federal income taxes and may also withhold state taxes as required by law.

Without proper monitoring, it can be easy to slip outside the 60-day rollover rule and incur taxes and penalties. That is why the IRS recently instituted a self-certification procedure for those IRA owners with legitimate reasons for missing this deadline. For further guidance, contact your tax advisor; also remember to track both before and after 60-day period ends any rollover amounts you intend to transfer over.

3. There is a penalty for a withdrawal.

Withdrawals from retirement accounts incur no penalties if you are aged 59 1/2 or younger (older people will incur income taxes upon withdrawals). Employer-sponsored plans such as SEP IRAs allow users to take any amount they desire at any time.

However, to withdraw retirement funds without incurring penalties it’s essential that they do so within 60 days from when you received them or else face income taxes and an early withdrawal penalty of 10%. If not done so you could incur both these liabilities.

Simply contact the new account custodian and complete paperwork – this process is known as direct rollover – without actually handling or taking custody of any funds yourself. Instead, the IRA custodian will send a check directly back to the original plan administrator with specific instructions as to where to mail it.

4. There is no penalty for a rollover to a Roth IRA.

Rolling retirement accounts can make consolidating investments and simplifying taxes much simpler, but before moving any money around, consult with a tax expert first.

Direct rollovers are generally preferable as they eliminate tax withholding; however, indirect transfers are possible by withdrawing funds from an old employer’s 401(k) plan and moving them yourself into an IRA account; in that instance, however, the IRS will send you Form 1099-R and you may need to pay income taxes plus any applicable penalties.

If you wish to transfer from a traditional to Roth IRA, the IRS allows one such transaction per calendar year without incurring taxes or penalties. Any earnings distributions made from your Roth account may require taxes. For more information about rolling over retirement accounts, check out this article by The Kiplinger Tax Letter; for expert commentary on tax laws, strategies, and predictions delivered directly into your inbox each week subscribe now to The Kiplinger Tax Letter!


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